1.8.2. Leasehold Estate Acquired. It is critical that the client agency provide the appraiser with a description of the leasehold estate it plans to acquire. In turn, the appraiser must fully understand the estate to be appraised and the impact on the market value of the property. 

It is important for the appraiser to recognize the characteristics of the rental or income streams being evaluated. Most often rent is paid periodically (e.g., monthly) in advance. However, when the government acquires a leasehold interest or right of use and occupancy in a property, it will usually pay rent in a manner that is inconsistent with the market. If the leasehold interest is acquired by condemnation, all of the rent due for the entire term of its occupancy is usually paid in a lump sum at the beginning of the occupancy (or on the date of acquisition). Therefore, an appraiser must convert any opinion of periodic market rent into a single lump sum present value or payment to be paid in advance. If the leasehold is acquired by negotiation, the rent may be paid in arrears or at different frequencies than is typical in the market, and the appraiser must account for this difference. 

If rent is paid by the government in a single lump sum, adjustment for this factor is typically accomplished by applying an ordinary annuity factor (present worth of 1 per period factor) to the periodic market rent (if the opinion of rent is projected to remain constant over the government’s occupancy). If the appraiser concludes that the market rent will not be constant throughout the government’s occupancy, the periodic rent is typically converted into a lump sum present worth by the use of present worth of 1 factors or by discounted cash-flow (DCF) analysis. 

The discount rate to be applied to the periodic rent should reflect the rates of return typical for the type of property involved. The selected discount rate should be supported by market data whenever possible. 

Appraisers must bear in mind that the leasehold estate acquired by the government may vary substantially from the terms of a typical lease in the private market. For instance, the term of the lease may be longer or shorter than typical for the type of space under appraisal. Expenses paid by the government may differ from those paid by the typical lessee, and there may be no provisions for expense stops and rental escalations during the lease term. The parking ratio for the space occupied by the government may vary from the market standard and there will be no provisions for rent concessions or lessor buildout of the occupied space. The appraiser must consider all of these factors when estimating the market or economic rent for the acquired space, and comparable rentals must be adjusted to account for these differences. Table 1 summarizes the most commonly encountered differences between private and government leases which must be accounted for in the adjustment process.